Economics of Education: Crash Course Economics #23

Summary

Crash Course Economics delves into the value and costs of education, discussing mandatory schooling, opportunity costs, and the economic benefits of higher education. It explores the U.S. education system's challenges, including inequality and funding disparities, and debates the merits of privatization, competition, and teacher incentives. The video also examines the financial returns of a college degree, the 'College Wage Premium,' and the rising student debt crisis, concluding that while college can be a worthy investment, its value depends on individual circumstances and the specific educational path chosen.

Takeaways

• 🏫 Nearly all countries require mandatory schooling, and most provide it for free, but there is always an opportunity cost.
• 💼 The cost of college includes not only tuition and books but also the potential income lost by not entering the workforce immediately.
• 🌐 Education is a positive externality, benefiting individuals and society as a whole through increased productivity and quality of life.
• 📊 The U.S. education system is undergoing significant changes, with discussions around education standards, vouchers, and student debt.
• 💲 In 2015, the U.S. federal and state governments spent about $634 billion on primary and secondary education, averaging to $12,500 per student annually.
• 🔍 The U.S. faces educational inequality, with disparities in test scores and high school dropout rates among different socioeconomic and ethnic groups.
• 💰 Some economists argue for increased funding for early education and additional support for disadvantaged students to level the educational playing field.
• 🏛️ Others advocate for more competition in education, such as charter schools and voucher programs, to improve school performance.
• 🎓 College graduates, on average, earn more (the 'College Wage Premium'), and have lower unemployment rates compared to those with only a high school diploma.
• 🤔 The benefits of a college degree are not solely due to the education received; they also reflect pre-existing advantages in intelligence, dedication, and socio-economic background.
• 📈 Both the 'Human Capital' theory, which suggests college teaches valuable skills, and the 'Signalling' theory, indicating a college degree as a validator of abilities, explain why college graduates earn more.
• 💡 Despite the high costs and student debt, completing college is generally a good financial investment, provided the degree is completed and is in a field that offers a return on the investment.

Q & A

What is the main topic of the video script?

The main topic of the video script is the economics of education, focusing on the costs, benefits, and societal implications of education, particularly in the United States.

Why do governments spend billions on funding universal public education?

Governments spend billions on funding universal public education because education is seen as a positive externality that benefits not just individuals but society as a whole by increasing productivity, GDP, and standards of living.

What is an opportunity cost in the context of education funding?

An opportunity cost in the context of education funding refers to the potential benefits that are foregone when resources are allocated to education instead of other social programs or debt reduction.

What is the 'College Wage Premium' and how does it relate to the financial benefits of college education?

The 'College Wage Premium' refers to the higher average earnings of college graduates compared to those with only a high school diploma. It is an indicator of the financial benefits of obtaining a college education.

What are some of the challenges faced by the US education system mentioned in the script?

Some of the challenges faced by the US education system include inequality, with lower test scores and higher dropout rates among students from low-income families and certain ethnic groups, as well as the high cost of higher education leading to significant student debt.

What are the two main theories economists use to explain why college graduates earn more?

The two main theories are the 'Human Capital' theory, which suggests that college education provides valuable skills for higher-income jobs, and the 'Signalling' theory, which posits that a college degree serves as a signal of intelligence and work ethic to employers.

What is the significance of the difference in earnings between those who have college credits but didn't graduate and those who did graduate?

The difference in earnings between these two groups helps to distinguish between the Human Capital and Signalling theories. A smaller gap supports the idea that both theories apply, as the signalling of a completed degree adds value beyond the skills acquired.

Why has student debt in the US reached over 1 trillion dollars?

Student debt has reached over 1 trillion dollars due to a combination of factors, including rising tuition costs, increased attendance at for-profit colleges, more graduate school enrollment, and the actual cost of running a college being higher than in the past.

How does the script address the issue of college affordability and the rising burden on students?

The script addresses the issue by discussing the rise in tuition costs, the median amount borrowed by students, and the fact that many students receive discounts through scholarships and grants, which moderates the increase in net tuition.

What alternatives to a four-year university education are mentioned in the script, and why might they be valuable?

The script mentions community college and apprenticeships as alternatives to a four-year university education. They are valuable because they provide specific training and skills for careers that can offer good wages and are in demand.

What is the final conclusion about the value of college education presented in the script?

The final conclusion is that the value of college education depends on various factors, including the institution attended, the cost of the degree, the specific field of study, and individual career goals and aspirations.

Outlines

00:00

📚 Introduction to Economics of Education

The video script begins with an introduction to the topic of economics in education by Adriene Hill and Jacob Clifford. They discuss the universality of mandatory schooling and the common misconception that education is free, highlighting the opportunity costs involved. The script introduces the concept of education as a positive externality, beneficial to both individuals and society, and sets the stage for a discussion on the U.S. education system, including current issues like inequality and the debate over funding, competition, and teacher incentives.

05:01

🤔 The Value and Cost of Higher Education

This paragraph delves into the financial aspects of higher education, questioning whether college is a worthwhile investment. It presents statistics on the 'College Wage Premium' and compares earnings and unemployment rates between college graduates and those with only a high school diploma. The script also addresses the non-random selection of college attendees and introduces two economic theories to explain the wage gap: 'Human Capital' and 'Signalling.' The discussion includes the impact of college degree signaling on socio-economic status and the mixed results from comparing the earnings of college graduates to those with some college credits but no degree.

10:02

💼 The Financial Reality of Student Debt

The final paragraph of the script addresses the rising issue of student debt in the United States, which totals over 1 trillion dollars. It examines the reasons behind the increase in student loans, including higher tuition costs, the role of for-profit colleges, and the growing number of graduate students. The paragraph also discusses the 'sticker price' versus the actual cost students pay after discounts and the factors contributing to the increase in college costs, such as competition, infrastructure, and administrative expenses. The script concludes by considering the value of college degrees in relation to the debt incurred and the alternatives to a four-year university education, such as community college or apprenticeships.

Keywords

💡Mandatory schooling

Mandatory schooling refers to the compulsory education that children must attend as required by law in most countries. In the video, it is mentioned that nearly all countries enforce some form of mandatory education, often provided for free, which underscores the societal importance placed on education as a foundational element for personal and societal development.

💡Opportunity cost

Opportunity cost is an economic concept that represents the potential benefit an individual, investor, or business misses out on when choosing one alternative over another. In the context of the video, it is used to illustrate the trade-offs involved in investing in education, such as the potential alternative uses of the resources or the income that could have been earned if one had entered the workforce instead.

💡Positive externality

A positive externality is a beneficial side effect or external benefit that affects a third party besides the consumer and producer of a good or service. The script explains that education is a positive externality because it not only helps individuals secure jobs and higher income but also contributes to societal benefits such as innovation, cultural enrichment, and improved public health.

💡Education standards

Education standards are the criteria or levels of achievement that students are expected to meet in their educational pursuits. The video discusses how the U.S. education system is undergoing changes, including the establishment of education standards, which aim to ensure that students are meeting certain levels of knowledge and skills across different subjects.

💡Vouchers

Vouchers in the context of education refer to certificates provided by the government that can be used to 'purchase' educational services from an approved school of choice. The script mentions voucher programs as a method to increase competition among schools, potentially leading to improved educational outcomes as schools strive to attract and retain students.

💡Student debt

Student debt refers to the money owed by students who have taken out loans to finance their education. The video highlights the issue of student debt in the U.S., noting that students have over 1 trillion dollars in debt, which is a significant financial burden and a topic of concern in discussions about the value and cost of higher education.

💡College Wage Premium

The College Wage Premium is the economic term for the additional income that college graduates earn on average compared to those with only a high school diploma. The video uses this concept to discuss the financial benefits of obtaining a college degree, stating that college graduates tend to earn more and have lower unemployment rates.

💡Human Capital

Human Capital theory posits that education provides individuals with skills and knowledge that increase their productivity and, consequently, their potential to earn higher wages. In the video, this theory is presented as one explanation for the wage premium associated with college graduates, suggesting that the skills acquired in college lead to better job opportunities and higher income.

💡Signalling

Signalling, in the context of education, refers to the idea that a college degree serves as a signal to employers about a graduate's abilities, work ethic, and potential for success in the job market. The video explains that a degree can act as a credible signal of these attributes, which can be difficult for job applicants to demonstrate otherwise.

💡Tuition

Tuition refers to the fees charged for educational instruction, typically at a college or university. The script discusses the rising costs of tuition and how it contributes to the overall burden of student debt. It also mentions that the 'sticker price' of tuition often differs from what students actually pay after accounting for financial aid and discounts.

💡For-profit colleges

For-profit colleges are educational institutions that operate to make a profit and are often criticized for their high tuition fees and the debt burden they impose on students. The video suggests that students at for-profit colleges tend to take on more debt and raises questions about the quality and value of the education they provide compared to non-profit institutions.

Highlights

Nearly all countries require mandatory schooling, and most provide it for free, but there is always an opportunity cost.

The cost of college includes not only tuition and books but also the potential income lost by not entering the workforce immediately.

Education is a positive externality, benefiting society through increased productivity, GDP, and standards of living.

The US education system is undergoing significant changes, including debates on education standards, vouchers, and student debt.

In 2015, federal and state governments spent approximately $634 billion on primary and secondary education in the US.

Inequality in the US education system is evident, with disparities in test scores and dropout rates among different socioeconomic and ethnic groups.

Some economists argue for increased funding for early education programs and additional support for disadvantaged students.

Others advocate for more competition in education through charter schools and voucher programs to improve school performance.

Investing in primary and secondary education is seen as the first step towards improving educational equality.

College graduates on average earn more, known as the 'College Wage Premium,' and have lower unemployment rates.

The financial benefits of a college degree must be weighed against the non-random selection of college attendees and their life circumstances.

Economists propose two theories for higher earnings among college graduates: 'Human Capital' and 'Signalling'.

Both theories suggest that college graduates earn more, supported by the comparison of earnings between those with and without degrees.

US students have over $1 trillion in debt, with many taking out loans to pay for their education.

The rise in student debt may be attributed to for-profit colleges, graduate school enrollment, and increased college operating costs.

The value of a college degree depends on the specific degree, the cost, and whether the student completes their education.

Alternatives to a four-year university, such as community college or apprenticeships, can also lead to well-paying careers.

Education has a social aspect, with an educated populace benefiting society as a whole, and can be instrumental in reducing poverty and income inequality.

Transcripts

Adriene: Welcome to Crash Course Economics, I’m Adriene Hill

Jacob: and I’m Jacob Clifford. Some of you might be watching this video in school right

now, but even if you’re not, you’ve probably spent a good chunk of your life getting educated.

Adriene: Nearly all countries require at least some mandatory schooling and most of those

countries provide that education for free.

Jacob: But nothing is ever actually free. There’s always an opportunity cost. The money

and resources that go into education might be used to fund other social programs or bring down the debt.

Adriene: And if you go to college, the cost is not just the tuition and books, it’s

also the income you could have earned by going straight into the workforce.

Jacob: But is college even worth it? Well, let's look at the economics of education.

[Theme Music]

Adriene: Why do governments spend billions funding universal public education? Why not

just let profit seeking businesses handle it? Many argue that if education was entirely privatized

it’s likely that some children would be excluded, and that would make society, as a whole, worse off.

Education is a positive externality. Education benefits individuals by helping them get a

job and earn more income, but it also benefits society as these individuals create art, invent

cool stuff, cure diseases, and make interesting conversation at parties. More education increases

productivity, GDP, and standards of living.

So, today we’re going to look at the education system in the United States. We’re talking

about the US not only because we make Crash Course in the US, but because education in

this country is going through a lot of changes. This way, we get to talk about things like

education standards, vouchers, and student debt.

Now, to be sure, there are places that do things differently. For example, in the European

Union college costs a lot less than it does in the US, or is even free.

In America, the government pays for primary and secondary public education and heavily

subsidizes college. In 2015, the federal and state governments will spend about 634 billion

dollars on primary and secondary education. That’s an average of about 12,500 dollars

per student each year. Which is a lot of money.

And despite all that spending, the US has some serious problems with its education system.

One of the biggest is inequality. Students from low income families tend to have lower

math and reading test scores than those from higher income families. African American,

Latino, and Native American students are much more likely to drop out of high school than

their White or Asian counterparts.

Jacob: For some economists, the best way to level the playing field is to focus on funding.

They argue that the government should pay for early education programs, and provide

extra money for disadvantaged and low-income students.

For others, the answer isn’t just about more funding, it’s about having more competition.

Some economists support charter schools and voucher programs that allow parents to pick

schools, or open enrollment among or within school districts.

Now in theory, this forces all schools to improve, or face losing their funding. Other

economists focus on the teachers, and argue that they should be incentivized to improve student performance.

Each of these ideas have been implemented in the US, with varying success. We have yet

to find the magic formula, but it’s clear that the first step to improving equality

is to invest in primary and secondary education.

Now, what about higher education? Is that a good investment? Well, keep in mind that

there are many reasons – not all of them economic - to go to college, and to be educated

in general. People go to college because they enjoy learning and want to know more. Or maybe

they want to put off getting a real job. But in economics, we focus on financial benefits. So, is college worth it?

The fact is, college graduates, on average, earn more. Economists call this the “College Wage Premium.”

Among 25-32 year-olds, college grads earn an average of $45,000 vs $28,000 for those who only

have a high school diploma. Also, the unemployment rate for college grads is pretty much always lower.

Right now, for people over 25 with a college degree, unemployment is around 3%. Now, that's vs. around

5.4 percent for those with only a high-school diploma. And it’s 8.6 percent for those who didn’t

finish high school. So bam – college pays off, case closed.

Adriene: Well, not quite. The people who graduate from college are NOT a randomly selected group.

First, it takes a modicum of intelligence and dedication to even get into college. Second,

you have to receive a fairly good primary and secondary education to be able to keep up with college work.

Third, the students who attend college are more likely to come from well-off families

with educated parents who have the time and energy to help encourage their success.

So when you compare college grads to those with less education, you’re often comparing

people from advantaged backgrounds to people without many of those advantages. The fact

that college graduates make more money isn’t just about college. It’s also about life

circumstances. Let’s go to the Thought Bubble:

Jacob: Economists point out two main explanations for why college graduates earn more. The first

is the “Human Capital” theory. The idea is that going to college actually teaches

you skills that’ll help you get a higher income job. The second theory is called “Signalling.”

This is the idea that some students have shown they're smart and hard-working, but in a job interview,

EVERYONE is going to claim “Sure, I’m smart and hard-working!” even applicants

who aren’t. So the talented applicants need something else to validate their abilities

that can’t be faked by others. A college degree sends a clear signal. "Look at me!

I graduated Summa, and I’ve got the notarized transcripts to prove it!"

Many employers would prefer an applicant that has an actual Harvard degree over one that

has an equivalent self-taught education. But a college degree isn’t only about signaling

ability, we could accomplish that with a test that would take one day and $100, rather than

4 years and potentially hundreds of thousands of dollars. College degrees send other signals

about socio-economic status and background.

BOTH the human capital theory and the signalling theory are compatible with the data: both

predict that college graduates would earn more, which is what we see.

But economists have tried to figure out which theory is correct. They have compared the

earnings of people who have earned 7 ½ semesters worth of college credits but didn’t graduate,

to people who finished and got a degree. Both groups received about the same amount of education,

so if the Human Capital theory is correct, they should earn about the same amount of

money. If the Signalling theory is correct, those with degrees should earn noticeably

more, and they do. But it’s a smaller gap than you would find from just comparing high

school and college grads. It seems that both theories apply.

Adriene: Thanks Thought Bubble. Okay, so we know that there are significant financial

benefits to completing college. But what about the costs? Going to college can be really

expensive. Often more than most families can afford. In the US, students have over 1 trillion

dollars of debt. That’s more than Americans owe on their cars or their credit cards!

More students are attending college than ever, and more of those students are paying for

at least part of their education with loans. In 2012, almost 70 percent of students took

out loans to pay for tuition, and the median amount they borrowed was around 27,000 dollars.

By comparison, in 1993, the median amount students borrowed was around 12,500 dollars.

And that’s just the median. So even if some of the hand-wringing over the total amount

of student debt is overblown, the average student really is taking on a larger burden.

So, this is all thanks to higher tuition, right? Well, not exactly. At four-year public

universities, the average cost of tuition, room and board has gone from $10,600 dollars

in 1994 to $18,900 in 2014, when you adjust for inflation. The average tuition at comparable

private universities has risen from $26,500 to $42,400 during the same period.

But that rising tuition number is the “sticker price” for college – in fact, most students

receive very substantial discounts. Students from wealthy families, with not-so-great SAT

scores might pay that full sticker price, but once you factor in cost reductions from

scholarships, fellowships, grants and other sources, many students pay substantially less.

Once you adjust for discounting, the rise in net tuition has been kind of modest.

So, why all the debt? Well, for-profit colleges and universities might be contributing to this.

Students at these schools tend to take on more debt than students at public schools

or private non-profits. It’s also possible that student debt is rising because graduate

school enrollment is up. And grad students borrow more than undergrads.

Another reason tuitions are increasing is because the actual cost of running a college

is higher than a few decades ago. As some schools compete for students and their money,

some of them build luxurious dorms, climbing walls and gourmet dining to attract revenue.

Another possibility is that colleges now employ more administrators and pay them a whole bunch of money.

Jacob: So, in cold, hard, merciless dollars, does it make sense to spend – or borrow

- a bunch of money on a college degree? Well, it depends a lot on the degree you get, but

on average the answer is, yes -- as long as you finish!

Many of the worst student-debt horror stories involve students who racked up large debt,

but were unable to finish college. And that’s surprisingly common: Every year in the US,

60% of high-school graduates enroll in college, but only a little over half actually graduate

within 6 years. That’s right: only half.

But what about students that don’t have the means or the inclination to go to a four-year

university? Are they doomed to live in squalor? Well, no, but again better money can be found

in careers that require specific training and skills, which can be learned through a

community college or through an apprenticeship. The average car mechanic earns $40,000 a year;

the average plumber earns $50,000; and the average electrician $55,000. And as more young people

opt to go to college and as older people in these careers retire, most economists expect these wages to rise.

So what is the final conclusion? Is college even worth it? Well, I guess in the end, we

have to say, it depends. It depends on where you go to school; how much you pay for your degree;

and it depends on what degree you get. And, of course, on what you want to do with your life.

Adriene: Education isn’t just another thing that you buy. It isn’t only about individual

gain. There’s a social aspect, too. We want everyone to have access to quality education

because having an educated populace benefits all of us. Education can also be a powerful

tool when it comes to reducing poverty and addressing income inequality, and we're gonna

talk about that next time. Thanks for watching!

Jacob: Thanks for watching Crash Course Economics. It was made with the help of all these nice people.

You can help keep Crash Course free, for everyone forever by supporting the show

at Patreon. Patreon is a voluntary subscription service where you can support the show with

a monthly contribution. Thanks for watching! DFTBA.